AUDIT U/S 44AB

Page no : 2

Rajeev (www.rkmco.com) (985 Points)
Replied 02 October 2009

Sunil ,

The guidance note of ICAI on tax audit , clearly states that advances received towards sales are in the nature of liability (current liability and not loan ) and cannot be said to be receipts of the business . I dont rememeber the para no of the guidance note , but it clearly states that "Advances are NOT to be counted as receipts of the business for 44AB" . I dont understand how current liabilties can be said to be receipts of the business .

Uday ,

I personally believe that the order given by mumbai tribunal is "Bad in law " .If the intention of the legislature was to include purchases in turnover , then why only gross receipts of business are included , they would have also inluded "gross expenses" . Similarly Advances paid towards future purchases would also be included . I am no authority to decide the order of the tribunal , its just a humble opinion , that the order seems bad in law . I dont agree with the view that purchases over 40 lacs attract audit .
But since its an order of the respected tribunal , i guess we should better follow it. I will be surprised , if it wasnt appealed against .

The term turnover is not defined in the IT Act , hence the meaning assigned to it will be (as per me ) :-

definition of "turnover" as given in Random House Dictionary, 1972 edn., at page 1418, which reads as under "the total amount of business done in a given time."

I am not sure if purchases would fall under the above definition of total amount of business done .

Total amount of business done would be sales in my opinion .

Now let us try and apply rules of interpretation to provisions of sec 44AB :-

The rules of construction which stipulate that when two or more words susceptible of analogous meaning are coupled together with nosc*nter a sociis, they are understood to be used in their cognate sense.

I think sales and turnover are susceptible of analogous meaning and are coupled together in 44AB , they both are to be understood in their "cognate" sense hence turnover would mean sales turnover for the purposes of sec 44AB (Defintion of cognate : allied or similar in nature or quality)

The legislature would have easily used the words Sales , purchases (instead of turnover ) or gross receipts .

When the word turnover is used , its used for a different purpose and NOT to mean that purchases would be included in turnover .Its used for determining turnover in specific cases like commission agents , shares etc etc .

HENCE I STRONGLY BELIEVE THAT PURCHASES ABOVE 40 LAKHS WONT ATTRACT TAX AUDIT EVEN IF THERE IS A TRIBUNAL JUDGEMENT AGAINST IT